If you’ve traded stocks, you’re probably familiar with all the indices available such as the Dow Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500, Wilshire 5000, and the Nimbus 2001. Oh wait, that last one is actually Harry Potter’s broomstick.
Well if U.S. stocks have an index, the U.S. dollar can’t be outdone. For currency traders, we have the U.S. Dollar Index (USDX).
The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign currencies against the dollar.
Say whutttt!?! Okay before you fall asleep after that super geeky definition, let’s break it down.
It’s very similar to how the stock indices work in that it provides a general indication of the value of a basket of securities. Of course, the “securities” we’re talking about here are other major world currencies.
The US Dollar Index Currency Basket
The U.S. Dollar Index consists of six foreign currencies. They are the:
- Euro (EUR)
- Yen (JPY)
- Pound (GBP)
- Canadian dollar (CAD)
- Krona (SEK)
- Franc (CHF)
Here’s a trick question. If the index is made up of 6 currencies, how many countries are included?
If you answered “6”, you’re wrong.